Three things jumped out at me when I saw the new results from EBRI’s Retirement Security Projection Model® (RSPM) showing that more American workers are on track to have a successful retirement — or at least one where they won’t run short of money: one, that’s good news; two, a lot of people are still not on track for a financially secure retirement; and three, even those that are on track are not guaranteed a “successful” retirement, as retirement is not just about money.

According to EBRI’s model, 59.4 percent of American households between the ages of 35 and 64 are projected to have sufficient money in retirement so that they won’t run short — meaning their aggregate resources in retirement will cover average retirement expenses as captured in the Consumer Expenditure Survey, as well as medical expenses such as nursing-home and home-health care. That is good news, and future analysis by EBRI will examine the driving forces behind this positive development.

At the same time, the finding also means that 40.6 percent of American households are not on track for a financially successful retirement. Many probably assume they will just work longer. That may be unlikely: according to the 2018 Retirement Confidence Survey, while the median worker believes he or she will retire at age 65, in reality, the median retiree left the work force at age 62. Further, while nearly a third of workers believe they will retire at 70 or older, only 7 percent of retirees actually did so.

The Society of Actuaries’ Committee on Post-Retirement Needs & Risks’ report on The Decision to Retire and Post-Retirement Financial Strategies provides sobering insights into why this is so. In a series of eight focus groups, people who voluntarily left the work force within approximately the past decade were asked a series of questions about retirement, including why they had retired.

A key finding was: “Even though retirement was voluntary, most of the participants retired in response to health issues, challenges in their workplace, or the need for family caregiving.” The quotes from focus group participants describe feelings of frustration with the workplace, weariness, inability to work due to physical limitations, lack of opportunities, and family obligations. To quote just one of the focus group participants: “I wanted to work until I was 65. But, my husband just passed about a year and a half ago. When he really got to the point, where I figured I needed to be there with him, I just cut it off at 62.”

Likewise, the prospects for working in retirement are also somewhat grim: while 4 in 5 workers expect to work for pay after retiring, just 1 in 3 retirees actually reported that they did so. Clearly a reality check is in order for those who simply believe continued work is a reasonable alternative to preparing for retirement.

But even those with the financial means to retire may not be as prepared as they think. According to the Retirement Confidence Survey, fewer than half of workers have thought about how they will occupy their time in retirement. In her article “Reboot, Rewire or Retire? Personal Experiences With Phased Retirement and Managing A Life Portfolio,” actuary Anna Rappaport talks about her experiences since retiring in 2004, sharing how important it is to plan the way you will spend your time and noting: “One cannot be on vacation all of the time. Vacation is a break from what we normally do. People who retire with the idea of an endless vacation are likely to be disappointed or bored within a year or two, if not sooner.” Instead, Rappaport described a successful, happy retirement as a life portfolio consisting of four key elements that have been carefully thought through and maintained:

Health: including activities to maintain health and a support system.

People: family, friends, community organizations, and maintaining and making new contacts.

Pursuits: work, volunteering, hobbies, community activities, caregiving, travel, and other activities that take time and provide satisfaction.

Places: home, travel, and community.

Rappaport concludes that “each of us should have a life portfolio as well as a financial portfolio. Just as a financial portfolio requires focus, diversification, and management, so does a life portfolio. However, the strategies that make sense for the life portfolio are very individual, and there are few established tracks for defining and managing a life portfolio.”

The key here for both the financial and lifestyle aspects of retirement is planning. Yet the Retirement Confidence Survey shows that only 4 in 10 workers have tried to figure out how much money they will need to live comfortably in retirement. Join EBRI’s American Savings Education Council on April 30 to hear the results from the 2019 Retirement Confidence Survey as well as the latest tools, information, education, and services that government agencies are making available to American workers and retirees to help them do a better job with the planning process as well as managing their finances.

Michael Lewis’ The Undoing Project artfully documents how psychologists Daniel Kahneman and Amos Tversky applied their unique ability to create behavioral experiments that resulted in monumental breakthroughs in understanding why people act the way they do. This, of course, led to the new and game-changing discipline of behavioral finance.

So EBRI has been engaged in its own Undoing Project by applying its strengths over the past year — its ability to create databases and the unparalleled skill of its researchers in mining these databases — to an emerging and increasingly popular area of employee benefits: overall financial wellness.

This is important work. As we start 2019, the role of financial wellness as an employee benefit seems poised at a crucial juncture. According to EBRI’s 2018 Employer Financial Wellbeing Survey, 3 in 4 HR professionals expressed some level of interest in financial wellness programs for their employees, with top reasons given for offering such programs being improved overall worker satisfaction, reduced employee stress, and improved employee retention. At the same time, employers are baffled by how to navigate the myriad of initiatives available to them. According to same survey, employers struggle with the complexity of financial wellness programs, often citing the myriad of moving pieces that typically constitute them. They note they lack staff resources to coordinate and market the benefits, which in turn are often underutilized by employees. Employers also say they are challenged in making the business case for financial wellness initiatives and struggle to quantify the value added of the programs. In a focus group of employers conducted by EBRI last year, one employer summed up the latter challenge concisely, declaring that while he could spend millions of dollars on an employer matching contribution for the 401(k) plan, he couldn’t effectively make the case for a $10,000 investment in financial wellness initiatives.

The sheer number of providers — many of them startups — can be daunting. One vendor noted that he’d counted 300 firms with offerings they purported to meet the definition of financial wellness initiative. Indeed, the designation “financial wellness solution” ranges quite widely: in EBRI’s survey, it included student loan debt help, bank-at-work partnerships, debt management services, and financial counseling. What constitutes emergency fund assistance is a good example of how wide a net is being cast when it comes to classifying initiatives as falling under the label of financial wellness. In EBRI’s survey, emergency assistance included 401(k) and 403(b) hardship loans, natural disaster funds, and low-interest loans. The wide breadth of employee financial wellness providers leaves employers wondering how they should even characterize what they are trying to achieve.

Measurement is an important tool — both in terms of quantifying the need for financial wellness initiatives and their impact. Regarding the former, some leading-edge employers are doing a considerable amount of work in that area. In a focus group that EBRI conducted last year, one employer explained a rather sophisticated financial wellbeing score they had devised to quantify the bottom-line impact of financial stress. “High” financial stress was defined as an employee with a significant financial issue such as a hardship withdrawal in their 401(k) plan or a wage garnishment on file. Likewise, employees with multiple minor financial issues, such as not saving in or taking a loan from the 401(k) plan, were also placed in the “high” financial stress category. On the other end of the spectrum, “low” financial stress was assumed when there were no financial issues indicated in any of the data. The employer then parsed out claims data, absenteeism, and performance ratings of employees by financial stress level. At the end of the day, the employer was able to show that high financial stress among employees had a bottom-line impact in terms of these measures — thus justifying the resources and out-of-pocket expenses used to seek to improve financial wellbeing among employees. Still, according to EBRI’s survey, only 14 percent of employers are connecting the dots on financial wellness and its bottom-line impact by creating a financial wellbeing score or metric as described above.

Quantifying how financial wellness initiatives move the dial is arguably the flip side of the measurement coin. If an employer can show that financial stress is linked to higher employee turnover, for example, it can in turn seek to demonstrate how the financial wellness initiatives put in place reduce such turnover. According to EBRI’s survey, the most critical measure of success for employers’ financial wellness initiatives is improving overall worker satisfaction, followed by reduced employee financial stress. Going back to the employer in EBRI’s focus group that developed a financial wellbeing metric, key measures of financial stress came right from 401(k) data: hardship withdrawals, loans, and plan participation. Clearly this type of data is far more accessible than credit scores, for example, and it arguably can provide an indicator of overall financial health. Like the canary in the coal mine, the presence of poor retirement savings behaviors can signal that something is amiss with an employee’s overall financial picture. At a minimum, they may point to a low level of financial skill.

This is where EBRI’s Undoing Project comes in. EBRI is fortunate in having decades of experience in developing and mining retirement and health benefits data. Leveraging this experience, in 2018, EBRI undertook its initial steps in creating a financial wellness database that it will mine to help employers, policymakers, and the industry better understand how financial wellness initiatives move the dial on employee financial wellbeing. We’ll ask questions such as whether interventions around student loan debt, emergency savings, and overall financial counseling, for example, change 401(k) behaviors. Over time, our goal will be to demonstrate links to overall wellbeing by tying in claims data as well.

Like the financial wellness industry itself, EBRI is broadly defining the types of initiatives that fit into its database with a view to being as comprehensive as possible. And, consistent with our mission, EBRI’s analysis will be objective and unbiased — our sole consideration will be to provide an assessment of how financial wellness initiatives are moving the dial on employee financial wellbeing.

We at EBRI are excited about our journey and ask others to join us. EBRI’s Financial Wellbeing Research Center consists of providers, plan sponsors, government agencies, and associations interested in better understanding the financial wellness landscape. For more information, email info@ebri.org.

In October 2018, regulations were issued by the departments of Treasury, Labor, and Health and Human Services — at the direction of an Executive Order by President Trump — to expand the use of stand-alone Health Reimbursement Arrangements (HRAs) by employers of all sizes.

This is another twist in the complicated history of HRAs.

HRAs first became available around 2001, when a handful of employers paired such arrangements with high-deductible health plans. These employers offered HRAs under then-existing law — which was unclear at the time. In 2002, the Internal Revenue Service (IRS) released Revenue Ruling 2002-41 and Notice 2002-45 (published in Internal Revenue Bulletin 2002-28, dated July 15, 2002) to provide guidance clarifying the conditions under which HRAs could be provided to workers on a tax free basis, and addressed questions related to the benefits offered under an HRA, the interaction between HRAs and cafeteria plans, FSAs, COBRA coverage, and other matters. One of the provisions in Notice 2002-45 allowed HRAs to be used on a stand-alone basis to reimburse workers for eligible health insurance premiums, which included premiums for health insurance purchased by workers directly from insurance companies in the individual or non-group market.

Then in December 2016, the 21st Century Cures Act included a provision known as the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which allows certain small employers to use HRAs on a tax-preferred basis to reimburse workers for health insurance purchased on the individual market, as well as deductibles, and cost-sharing more generally. A year later, President Trump issued his executive order.

Under the newly-proposed regulations, two types of HRAs would be allowed.

A stand-alone HRA that could be used to purchase coverage in the non-group market, with no contribution limit. The HRA must be used to purchase ACA-compliant plans and must meet ACA affordability requirements in order for the employer to meet the shared responsibility requirement. The HRA will not be subject to ERISA if certain conditions are met.

An “excepted benefit HRA,” where employers would be able to contribute up to $1,800 that workers could use to pay their out-of-pocket cost sharing and/or certain premiums, such as those for short-term health insurance, COBRA, disability insurance, and dental and vision insurance. When offering an excepted benefit HRA, employers must also offer a group health plan, but workers could decline it and get coverage in the non-group market. Employers are not allowed to offer both the stand-alone HRA and excepted benefit HRA to the same class of workers.

The administration expects around 800,000 employers will offer stand-alone HRAs by 2024 and beyond. As a result, some 10.7 million individuals would be covered by such an HRA by 2027 and 6.8 million fewer workers (and their dependents) would have traditional employment-based health coverage. It is no surprise that there would be fewer people with employment-based health coverage. Employers have been interested in the concept of “defined contribution (DC) health” coverage and giving workers an HRA that they can use to purchase coverage in the non-group market may be an attractive means of moving to DC health. Employers never moved in the direction of giving workers a fixed contribution to purchase health insurance for a number of reasons. Historically, they were hesitant to drop group coverage in favor of offering individual policies because the non-group market was not considered a viable alternative to the employment-based system. And, more recently, even with the advent of private health insurance exchanges, employers did not embrace them as the initial hype would have expected us to believe.

There is no question that the HRA provision gives employers the means to drop traditional health coverage and go to a “DC health”-type plan. One of the concerns is that employers will try to structure their plans in such a way to send high-risk employees to the individual market. The regulations include a number of provisions to prohibit such a discriminatory practice. However, what if only employers facing the highest premiums in the group market adopted HRAs? If such a phenomenon occurred, the non-group market would not become more stable, and may see average premiums increase, which the group market would see a reduction in average premiums as higher risk groups left.

Employers may require that there be a viable non-group market for their employees to go to before moving to HRAs. Stability in premiums may be one requirement, which may make it less likely that multi-state employers move to HRAs given the variation in premium growth across states. The quality of the benefits offered is another consideration. For instance, the prevalence of narrow network plans in the non-group market may be something that continues to hold employers back from HRAs. And of course there is always the uncertainty of future changes in the non-group market, as employers have no control over that marketplace and would have no control over how workers spent HRAs in the non-group market.

There are a number of unanswered questions. Which employers would go in this direction, under what circumstances, and for which employees? Would it vary by firm size? Do the strength of the economy and labor market conditions factor in? The next recession will be the first recession in history since the insurance market reforms were put into place by the ACA. It will be the first time in history that a recession was paired with the inability of insurance companies to deny people coverage for pre-existing conditions or to charge them more for such conditions. It will also be the first time that health insurance premiums for people under 400 percent of the federal poverty level would be subsidized by the federal government during a recession in a meaningful way. Employers may decide that they no longer need to offer health benefits to be competitive in the labor market during the next recession, and the combination of the insurance market reforms and the ability to give workers tax-free money to purchase health insurance on their own may finally put the future of employment-based health coverage to the test.

The new regulations are expected to be finalized early next year and take effect for plan years beginning on or after Jan. 1, 2020.

The 40th anniversary of the introduction of Sec. 401(k) to the Internal Revenue Code is particularly significant to me on several levels. As a retirement professional, I have seen my career closely track the ups and downs of 401(k) plans. I’ve watched them evolve from tiny supplemental savings plans, to useful benefits for attracting and retaining workers, to the primary employer-sponsored retirement plan of corporate America. But now as 401(k) plans turn 40, plan sponsors, policy makers, and the industry must decide how they fit into the decumulation phase of workers’ lives.

I started saving in my own 401(k) around 1990. It was a brand-new oﬀering by my employer, and I had previously only had an IRA for my retirement planning. At that time, there were just under 98,000 401(k) plans and about 20 million active plan participants. Total assets in these plans at the time were $385 billion.

In the early 1990s, Sec. 404(c) was written into the Employee Retirement Income Security Act of 1974 (ERISA). This new safe harbor allowed plan fiduciaries to not be liable for investment losses suffered by plan participants who self-direct their investments, provided that the plan sponsor met certain conditions. One was oﬀering basic information about plan investment options. Nonetheless, in 1993, when I was still a pretty new investment consultant, a plan sponsor nearly hung up the phone on me when I suggested he oﬀer help to participants on selecting their investments. Like many back then, he feared this would be construed as fiduciary investment advice — for which he could be held responsible.

The Department of Labor (DOL) then issued Interpretive Bulletin 96-1, giving plan sponsors much more latitude to educate participants. However, there was still no safe harbor for advice. I experienced the challenge of this every time I conducted a participant meeting. For example: Standing in front of a refrigerator in a break room at 7 a.m. at a manufacturing plant, I was trying to teach a room full of women (for whom English was a second language) asset allocation. At the end of the presentation, one of the women raised her hand and asked me if I could just tell her which investments to select. Of course, I could not. (Actually, before I could answer to tell her that, her supervisor instructed her to ask her husband. But that is another story.)

The dawn of automatic enrollment came in the year 2000, when the IRS issued guidance on “negative elections.” People like the woman in the break room at the manufacturing plant now could be enrolled into a 401(k) plan without having to figure out their own investment elections. This seemed like a pretty big deal to me, and now that I was director of retirement research at 401(k) recordkeeper Hewitt Associates, I could examine the impact of automatic enrollment on 401(k) participation. Working with David Laibson and James Choi at Harvard University, we found that few people opted out under automatic enrollment. At the same time, few people also increased their contribution rate, even if it was a very low rate such as 2 or 3 percent of pay. I presented this research at various conferences, and invariably someone in the audience explained how they would never oﬀer automatic enrollment because of concerns about state wage garnishment laws. So, adoption remained low.

401(k) plans received a big boost with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which increased the amount participants could contribute to their plans and created catch-up contributions, among many other provisions. That same year, the SunAmerica Advisory Opinion was issued by the DOL, permitting asset allocation services to be provided to participants in ERISA-covered plans under certain conditions. This launched managed accounts, a type of early robo-advice for 401(k) participants.

Of course, 9/11 also happened that year, and with it, a market collapse. Plan participants generally stood firm: I was in charge of the Hewitt 401(k) index at the time, which saw net transfers of just 1.4 percent of balances in the month of September 2001.

In 2004, the number of plans with a 401(k) feature clocked in at 418,553. There were 44,407,000 active participants in 401(k) plans with total assets of $2.19 trillion. There was also a new type of investment option available: target-date funds. These allowed plan participants to invest in professionally managed portfolios tied to their retirement time horizon. However, few sponsors used them as the plan’s default investment. Again, there was no safe harbor protection around defaults, and many sponsors were counseled that stable-value funds were a more prudent option because the possibility of loss was remote.

The Pension Protection Act of 2006 (PPA) changed many things. It created a safe harbor for automatic enrollment and sanctioned the use of automatic contribution escalation. The latter was the brainchild of Richard Thaler of University of Chicago and Shlomo Benartzi of UCLA. Originally named Save More Tomorrow™, automatic contribution escalation—like automatic enrollment—leveraged behavioral finance. In this case, it recognized that the same people who are reluctant to increase savings today may allow their contributions to be automatically increased over time. (Note: Research shows they generally do.) Under the final regulations issued by the DOL in 2007, target-date funds were deemed to be a qualified default investment alternative within the PPA’s automatic enrollment safe harbor. The PPA also provided ERISA pre-emption of state wage garnishment laws. Use of automatic enrollment, automatic contribution escalation, and target-date funds subsequently soared.

The year 2006 saw another milestone as well: Schlichter Bogard & Denton filed its first lawsuits alleging excessive fees in 401(k) plans. As the DC practice leader at Callan Associates, I saw requests for fee analysis by plan sponsors skyrocket. Many wanted to understand how they could eliminate the practice of revenue sharing. A once-popular way to pay for plan administration, revenue sharing allocates an agreed-upon portion of an investment fund’s expense ratio back to the plan’s recordkeeper. The fee lawsuits took issue with this approach.

The market collapse of 2008 was as tough on 401(k) plans as it was on everything else. During the market decline of 2001–2002, people had joked that their plan was now a 201(k). No one joked about the 2008–2009 collapse. Times were so hard that some plan sponsors were forced to eliminate their employer matching contributions. One plan sponsor’s comment summarized the angst of that period: “I just want to know what is going to blow up in my plan next.” Although the number of plans with a 401(k) feature was now up to 511,583 and the number of active participants was 59,976,000, total assets slumped from nearly $3 trillion in 2007 to $2.23 trillion at the end of 2008.

The markets — and 401(k) plans — have since bounced back with a vengeance. In 2016, a Department of Labor survey found that 62 percent of workers had access to some type of defined contribution plan, most likely a 401(k) plan. Of those with access, 72 percent were participating. Assets in 401(k) plans as of the end of 2017 stand at $5.28 trillion.

My personal journey with 401(k) plans finds me celebrating their 40th anniversary as president and CEO of the Employee Benefit Research Institute. And we are celebrating our own 40th anniversary. EBRI was conceived in 1978 for the purpose of researching not only 401(k) plans, but all employee benefits. Today, the EBRI/ICI 401(k) database is the largest of its kind in existence, housing 27 million participants’ data on balances, investments, and activities. The database shows that workers with the greatest proportion of assets in 401(k) plans are those in their 50s. Forty-three percent of assets reside with workers who are mostly in the final stretch of their career before retirement. These workers are likely to rely on their 401(k) assets as their primary, or potentially their only, retirement nest egg. They face the daunting challenge of figuring out how to draw down their assets so that their nest egg lasts their full retirement. They don’t know how long that retirement will be, what health care costs they will face, or how the markets will perform.

Many do not use their 401(k) plan as their drawdown vehicle. EBRI finds that in 2016, the amount of dollars moved to IRAs through rollovers was more than 16 times the amount contributed directly to IRAs. And for the most part, retirees’ drawdown strategy is simply to take the required minimum distribution. Our research shows that, depending on the size of the nest egg, only between about 12–27 percent of assets are drawn down over the course of the typical retirement. When asked, retirees say they would rather preserve assets for a rainy day rather than spend them, even if it means living well below their ability.

As the 401(k) celebrates its 40th anniversary, the question arises: Ultimately how useful is a retirement account that people are afraid to spend? And does the 401(k) need to do more to benefit the huge new wave of retirees that will depend upon it?

President Trump’s August 31 Executive Order (EO) on Strengthening Retirement Security in America could be a game changer for the retirement prospects of workers at small businesses. According to the Bureau of Labor, while 89 percent of workers of larger employers (500 or more employees) have access to retirement plans, for workers at smaller employers (less than 100 employees) that proportion drops to 53 percent¹. This clearly contributes to the $4.13 trillion aggregate retirement savings shortfall that EBRI estimates American workers face, according to its Retirement Security Projection Model.®

First, some background: Why do small employers refrain from offering retirement plans? Cost is a key factor. A Pew Charitable Trusts survey found that the top reason small business owners give for not offering a retirement plan is cost (followed by resources).² More widely available multiple employer plans (MEPs) could alleviate cost burdens by allowing small employers to band together and gain economies of scale. Trump’s EO calls for expanding access to multiple employer plans by addressing issues that have prevented widespread adoption of such plans. Namely, the EO instructs the Secretary of Labor to consider new rules around when a group or association of employers qualify for a MEP (the “common nexus” requirement). It asks the Secretary of the Treasury to consider amending regulations to address consequences if employers within MEPs fail to meet plan requirements (the “one bad apple” rule).

Whether both the common nexus and one bad apple rules can be properly addressed is the subject of a different blog. Further, we’ll let others assess whether the hoped-for economies of scale will actually materialize. But assuming the answer to all of the above is “yes,” a further question is: Will small employers adopt more widely available MEPs?

The data are mixed. In one provider survey, 33 percent of small employers (5–99 employees) indicated that they would be likely to consider a MEP if easily accessible. Meanwhile, the Transamerica Center for Retirement Studies finds that among companies that say they are not likely to offer a 401(k) plan — many of which cite not being big enough — a quarter would consider joining such a MEP.³ However, 23 percent were “somewhat likely” to do so — only 2 percent said they were “very likely.” The Transamerica study also points out that less than a third of employers view an employee-funded retirement plan as very important in attracting and retaining employees.
At the same time, among small companies that do not offer a 401(k) or similar plan, Pew found that about a quarter were likely to begin sponsoring a plan in the next two years — and this was before the EO. It is possible that a MEP gives such plan sponsors an easier pathway to offering benefits, allowing them to more easily change their intentions into action. And indeed, nearly half of those in the study said that availability of a plan with reduced administrative requirements would increase the likelihood of their organization offering a retirement plan in the future.

Assuming that a third of small employers that do not currently offer DC plans adopt MEPs going forward, preliminary estimates from EBRI’s Retirement Security Projection Model® indicate that the $4.13 trillion aggregate retirement savings shortfall would be reduced by $65 billion.

But this assumes 100 percent participation among eligible employees, and that small businesses joining MEPs will implement plans that look similar to existing plans of companies of their size. The majority of small employers, according to the Pew survey, do not offer automatic enrollment or automatic contribution escalation, although many offer employer contributions. If cost is truly the reason small employers don’t currently offer such plans, it is possible that fewer employers that participate in MEPs will offer employer contributions than average. Without automatic enrollment and automatic contribution escalation, participation in such plans may be low.

Importantly, in the Transamerica survey, 88 percent of workers believed that the value of a 401(k) or similar plan is an important benefit, and 81 percent agreed that retirement benefits offered by a prospective employer were a major factor in the final decision to accept a job.

1March 20172Small-Business Views on Retirement Savings Plans: Topline Results of Employer Survey. 2016 Pew Charitable Trusts report.3Striking Similarities and Disconcerting Disconnects: Employers, Workers, and Retirement Security. 18th Annual Transamerica Survey. August 2018.4Under the Obama proposal, the model assumes a 3 percent default contribution rate and no opt-outs. It further assumes that there were no employer contributions and that no current defined-contribution-plan sponsors decided to discontinue their current plan and shift to the auto-IRA.5ARPA assumes triennial automatic enrollment with a default contribution rate of 6 percent, and auto contribution escalation at 1 percent per year [up to 10 percent]. Assumes no opt-outs for this calcuation.6This analysis assumes that all employers offer a type of plan and a set of generosity parameters similar to employers in their size range. Assumes observed contributions and opt-outs.

I recently moderated a discussion entitled “Modernizing the U.S. Retirement System” at a meeting by the American Academy of Actuaries. The panel consisted of some of the best thinkers in retirement: Ted Goldman of the American Academy of Actuaries; Stephen Goss of the Social Security Administration; Mark Iwry of The Brookings Institute, and former Senior Advisor to the Secretary of the Treasury; and Steve Vernon of the Stanford Center of Longevity.

For them, the challenge is clear: The onus is increasingly on American workers to secure their retirement future, and many are not up to the task. Ted Goldman compared it to asking drivers to assemble their own cars before going to work in the morning — most would simply stare at the pile of auto parts in confusion. Yet American workers are expected to manage their retirement plans as if they are financial professionals.

Car Parts Retirement Parts

In addition, the panel concluded, our retirement system has serious holes around coverage and adequacy. Yet policymakers continue to address these gaps in only a fragmented way.

Some of the ideas from the panelists were controversial, but many were just common sense, such as creating protections and incentives for employers and providers to offer solutions that help individuals do a better job of assembling their retirement parts.

How can we do this? Mark Iwry gave the example of how he used rulings and general information letters starting in 1998 to make employers comfortable with offering automatic enrollment in DC plans. His efforts were clearly critical in putting automatic enrollment on the map when it comes to DC plan design. However, the reality remains that automatic enrollment was still hampered by considerations such as state wage laws and lack of a safe harbor; take-up rates remained low despite his efforts. Then came the Pension Protection Act of 2006. Once plan sponsors had the protections they needed, adoption soared. Today the majority of large 401(k) plans have adopted automatic enrollment, and most with automatic enrollment also have automatic contribution escalation in place as well. There is no doubt this has led to higher participation and contribution rates by American workers.

The clear message is that it takes creative solutions as well as a partnership between the private sector, regulators, and legislators to develop a holistic approach that will ultimately lead to a retirement system that does a better job of securing American workers’ financial future. The dialogue started at the American Academy of Actuaries needs to continue.

My theme for the year seems to be: “Getting the facts right matters.” But a corollary to this is: “Interpreting analysis correctly is important, too.”

A case in point is the coverage of the Employee Benefit Research Institute’s (EBRI) Issue Brief, “Cumulative Out-of-Pocket Health Care Expenses After the Age of 70,” published on April 3, 2018. Based on data from the Health and Retirement Study, we reported that while for some retirees, costs such as out-of-pocket nursing home expenses can be substantial, the majority of older people pay modest out-of-pocket health care expenses in retirement.

Some in the press and within the industry interpreted this to mean that previous studies projecting the amount of savings required for couples to cover their health care expenses, including premiums, in retirement, have been overstated. For example, some note that health care cost projection studies have found that an average couple retiring today at age 65 needs between $280,000 and $370,000 to cover health care expenses in retirement. These numbers, it is concluded, are not the modest out-of-pocket health care expenses calculated in EBRI’s April research.

This conclusion simply doesn’t hold up: The two analyses have materially different intent, scope, data, and assumptions.

The intent of the studies that project health care costs in retirement is to help workers understand how much they may need to save for a financially secure retirement that includes adequate health care coverage. These studies use assumptions about types of Medicare coverage people will have during retirement, and to a large extent, reflect the premiums for such coverage.

In contrast, the out-of-pocket health care costs study EBRI issued in April was intended to provide a good understanding of the risks of out-of-pocket health care expenses faced by retirees—beyond health care premiums. That study used self-reported out-of-pocket costs including hospital stays, nursing home stays, outpatient surgery, doctor’s visits, prescription drugs, dental services, home health care, and hospice care after age 70 from a household survey in order to show the magnitude of such costs during retirement.

Other key differences between the April 2018 report and the two other reports are that the April 2018 study:

• Examines individuals, not couples
• Takes into account expenses for people after the age of 70 (not including those ages 65-69).

We also noted in the April report that, because of data limitations, reported cumulative out-of-pocket medical expenses should be interpreted as the lower bound of such expenses, rather than the true estimates of the means or medians. Further, we noted that health care expenses could be catastrophic for some individuals, and ranged from just under $172,000 to just over $269,000 for a single person at the extreme end of the distribution. We also noted that it is not easy to predict in advance who will actually have high medical expenses, and that as a result, the risk of high medical expenses remains a significant one.

It is critically important that workers preparing for retirement understand the amount they will likely need to save in order to have adequate health care coverage in retirement. But workers and retirees also should understand the magnitude of the out-of-pocket costs that they may experience beyond medical premiums due to catastrophic health care needs such as long-term care in retirement.

Both are valuable insights—but conflating the two can be misleading for both workers and policymakers. This is a good lesson about interpreting research in general.

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EBRI Perspectives serves to supplement EBRI’s regular publications, and allows EBRI to provide observations based on our research, as well as on questions that we get from news reporters, policymakers, and others.
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